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Credit risk seen as top economic threat in survey

August 25, 2007|From the Associated Press

new york -- Bad credit has supplanted terrorism as the gravest immediate threat to the economy, a national research group reported Monday.

Borrowers' weakening ability to pay their bills and the subsequent fallout in the credit markets this summer topped the list of short-term risks on people's minds, according to a survey of 258 members of the National Assn. for Business Economics.

Washington-based NABE said 32% of its surveyed members cited loan defaults and excessive debt as their biggest near-term concern.

Only 20% cited defense and terrorism as their biggest immediate worry, down from 35% when the survey was last conducted in March. Credit risk also topped gas prices, inflation and government spending.

"Financial market turmoil has shifted the focus away from terrorism and toward sub-prime and other credit problems as the most important near-term threats to the U.S. economy," said Carl Tannenbaum, president of NABE and chief economist at LaSalle Bank/ABN Amro.

The market turmoil began when mortgage lenders like New Century Financial Corp. and H&R Block Inc.'s Option One Mortgage Corp. unit reported that their clients were missing payments on their home loans more frequently.

This led the Wall Street banks that finance the mortgage market to ultimately pull much of their money out. With cash draining from the industry, more than 50 lenders have gone bankrupt and a number of investment funds have gone under.

Victims of this flare-up include two of the 10 biggest mortgage lenders in the country and two hedge funds managed by Bear Stearns Cos. Sub-prime loans, or loans to people with spotty credit histories, have all but disappeared as lenders scale back or shut down completely.

The shakeout in the sub-prime mortgage market forced investors around the world to reassess how much risk they were willing to stomach. This led to an exodus of cash from investments like securities backed by home loans, short-term corporate bonds and stocks that were subject to takeover speculation.

In the last five weeks, the stock market has pulled back and the dollar has fallen to an all-time low versus the euro. A number of firms have had to cancel bond sales for lack of buyers.

And the Federal Reserve has lent billions of dollars to banks from its "discount window," normally associated with bailouts for struggling financial institutions. The Fed recently said that the risks to the economy have risen considerably, and many traders expect the central bank to cut targets for interest rates this year.

The financial tumult has led businesses to reinterpret the housing boom earlier this decade and the easy credit that fueled it, NABE said. The proportion of surveyed members who call it a "serious national bubble" more than doubled from two years ago to 29%.

NABE said the market turmoil is considered a short-term risk because the five-year outlook for housing is still strong. More surveyed members expect home values to appreciate in the next five years than fall.

The greatest long-term risk facing the economy is still healthcare costs and the medical needs of an aging population, NABE said.

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